How Much Does It Cost to Refinance Student Loans? Fees and Other Factors to Consider

Refinancing your student loans can help you secure a lower interest rate or better repayment terms, potentially saving you money over time. Most lenders don’t charge upfront fees for refinancing, making it an attractive option for borrowers looking to reduce costs.

However, hidden costs like origination fees, late fees, or higher long-term interest can still impact your savings. Understanding the potential costs and benefits is essential to deciding if refinancing aligns with your financial goals. Keep reading to explore the true cost of refinancing and how to choose the best option for your situation.

What is the cost to refinance student loans?

Refinancing your student loans isn’t always free of costs. While most lenders don’t charge upfront fees, some expenses can arise depending on the lender and how you manage your loan. Below, we’ve broken down the most common fees and other financial factors to consider.

Common fees

Here are the most frequent fees you might encounter when refinancing student loans:

• Application fee: Charged by some lenders to process your application, whether or not it’s approved.
• Origination fee: A percentage fee deducted when funds are disbursed. Yrefy charges 5%, while MPOWER charges 2%.
• Late fee: A penalty for missing your payment due date beyond the grace period.
• Returned payment fee: Charged if your bank declines a payment due to insufficient funds.
• Prepayment penalty: Rare but still found with some lenders, this fee applies if you pay off your loan early.
• Forbearance fee: A charge for entering forbearance due to financial hardship, though less common today. Sallie Mae, for example, previously charged a forbearance fee.
• Collection fee: If you default on your student loans, your lender may pass on costs for collections or legal action.

When refinancing, prioritize lenders that don’t charge origination fees or prepayment penalties to keep costs lower. Learn more about how refinancing student loans works to identify the best lenders for your situation.

Try to avoid origination fees, or at least calculate those into the total interest cost when deciding to refinance. I would avoid any loan that has a prepayment penalty or forbearance fees.

Jim McCarthy, CFP®

Other cost considerations

Refinancing your student loans can also have broader financial impacts. Here are key factors to evaluate:

• Total interest paid: Extending your term can lower monthly payments but often increases the total interest paid over time. Use a student loan refinance calculator to estimate the long-term cost.
• Debt-to-income ratio: Lowering your monthly payment can affect your DTI ratio, which might influence your eligibility for other loans, like mortgages.
• Variable-rate loans: These loans start with lower rates but can rise over time. Refinancing to a fixed rate eliminates this risk. Learn more about the pros and cons of fixed vs. variable-rate loans.
• Federal student loan benefits: Refinancing federal loans removes protections like income-driven repayment plans and forgiveness programs. Read about federal loan benefits, such as student loan forgiveness, to decide if refinancing is right for you.
• Credit score: A hard credit inquiry during refinancing can temporarily lower your score. This might impact your ability to secure other credit.
• Student loan interest tax deduction: Refinancing could change the amount of interest you pay, affecting your annual deduction (up to $2,500).
• Cosigner impact: Refinancing can allow you to release a cosigner, but if one is still required, consider the impact on their credit and liability. Learn more about the pros and cons of student loan cosigners and how refinancing could affect them.

The decision to refinance mostly depends on individual budgets, but the goal of any refinancing should be to lower the total interest paid over the life of the loan.

Jim McCarthy, CFP®

How much can I save by refinancing student loans?

Refinancing your student loans can help you save in two key ways:

• Short-term savings: Reducing your monthly payment to free up more cash each month.
• Long-term savings: Lowering the total interest paid over the life of your loan.

Let’s look at an example to understand how refinancing affects both.

Example: How refinancing affects savings

Imagine a borrower with a $75,000 loan balance refinancing two years after graduation. Here’s how their savings break down:

By refinancing, this borrower lowers their monthly payment by $189, but they end up paying $3,209 more in total interest due to the extended loan term.

Explore your own savings potential

Every borrower’s situation is unique, and your savings will depend on your current loan details, interest rate, and chosen term length. Use our student loan refinance calculator to input your information and discover how much you could save—both month-to-month and over the life of your loan.

How to choose the right student loan refinance option

Refinancing your student loans can be a powerful tool to lower monthly payments, save on interest, or both. Here are some detailed steps to help you select the best refinancing option for your financial goals:

1. Review your credit report

Start by pulling your credit report from all three major credit bureaus—Experian, Equifax, and TransUnion. Look for errors, such as incorrect account balances or late payments, which could lower your credit score. Dispute any inaccuracies directly with the credit bureau to ensure your report reflects your true creditworthiness. A clean report can help you qualify for better rates.

2. Check your credit score

Your credit score plays a major role in determining the rates lenders will offer. Most lenders require a score of at least 650, but scores above 700 will typically secure the most competitive rates. Once you know your score, research current student loan refinancing rates for borrowers with similar profiles to get a sense of what’s possible.

3. Use a refinance calculator

A student loan refinance calculator can help you estimate your potential monthly payments, total interest costs, and overall savings. Compare scenarios with different rates and term lengths to see how they impact your finances. For example, refinancing to a shorter term might save you on interest but increase your monthly payments, while a longer term can reduce your monthly payments but increase total interest paid.

4. Shop around with multiple lenders

Don’t settle for the first lender you check. Get prequalified with at least three lenders to compare rates, terms, and fees. Many lenders offer a soft credit check for prequalification, so you can see estimated rates without impacting your credit score. Remember to look beyond the advertised interest rate and evaluate factors like origination fees, prepayment penalties, and customer service.

5. Maximize interest rate discounts

Lenders often provide discounts for specific actions, such as enrolling in autopay or maintaining a qualifying bank account. Autopay discounts alone can save you 0.25% or more on your interest rate. Make sure you meet the eligibility requirements for all available discounts to lower your loan’s overall cost.

6. Consider federal loan trade-offs

If you’re refinancing federal loans, remember that you’ll lose access to federal benefits like income-driven repayment plans, forbearance, and loan forgiveness programs. Evaluate whether the savings from refinancing outweigh the potential loss of these protections, especially if you anticipate financial hardship or eligibility for forgiveness programs.

7. Think about cosigners

If your credit score isn’t strong enough to qualify for competitive rates, consider applying with a cosigner. However, ensure your cosigner understands their financial responsibility and potential risks. Alternatively, look for lenders offering cosigner release after a set number of on-time payments.

8. Read the fine print

Before committing to a lender, review the loan agreement carefully. Pay close attention to fees, repayment terms, and any clauses that could affect your ability to manage the loan (e.g., prepayment penalties or forbearance policies). Understanding the details upfront can save you from surprises later.

FAQ

What’s the difference between refinancing and consolidating student loans?

Refinancing student loans entails obtaining a new loan from a private lender to pay off one or more loans. This can lower interest rates and save you money over the loan term. It also allows switching from a variable interest rate to a fixed one. 

Consolidating student loans often combines multiple federal student loans into a single one. This process doesn’t usually lower your interest rate but can streamline repayment. It might also grant access to alternative repayment plans or loan forgiveness programs.

Can you refinance federal and private loans together?

Yes, you can refinance federal and private loans together. Remember: When you refinance federal loans with a private lender, you’ll lose access to benefits such as income-based repayment options and potential loan forgiveness programs. 

Before deciding to refinance, consider the potential loss of these benefits against the advantages of a lower interest rate or simpler repayment plan.

How often can you refinance student loans?

There’s no limit to how many times you can refinance student loans. If market conditions change or if your credit score improves, you might be able to secure a better interest rate by refinancing again. 

However, always remember that refinancing involves application processes, credit checks, and sometimes, fees. It’s crucial to ensure the savings outweigh the costs before you decide to refinance again.